Jan. 18 (Bloomberg) -- International Business Machines Corp., the world's biggest computer-services company, said fourth-quarter profit increased 11 percent. The shares fell as sales of hardware trailed analysts' estimates.

Net income rose to $3.54 billion, or $2.31 a share, from $3.19 billion, or $1.99, a year earlier, the company said in a statement today. Sales gained 7.5 percent to $26.3 billion.

Computer hardware sales rose 4.3 percent, less than the 5.5 percent growth predicted by Banc of America Securities analyst Keith Bachman, as IBM shifted its focus to more profitable services and software units. The company signed $17.8 billion of computer-services contracts, including agreements from the state of Texas and the German army.

``They had some good news in there, but it was offset by some bad news as well,'' said Rob Enderle, president of the Enderle Group research firm in San Jose, California. He attributed the drop in IBM shares partly to ``overall nervousness'' in the market about technology stocks.

Shares of Armonk, New York-based IBM fell $5.25, or 5.3 percent, to $94.20 in extended New York Stock Exchange trading. IBM's announcement follows disappointing reports from Apple Inc., Intel Corp. and Lam Research Corp., which helped drive down stocks today. The Nasdaq 100 Index fell 1.9 percent to 1793.68, its third straight decline.

Knee-Jerk

``I suspect once the smoke clears these stocks will be back up above their previous highs,'' said Richard Cripps, an analyst at Stifel Nicolaus & Co. in Baltimore. He called the share decline after the earnings report a ``knee-jerk'' reaction.

Excluding discontinued operations, earnings were $2.26 a share, beating the $2.19 estimated by analysts surveyed by Bloomberg. That figure was inflated by a gain of 6 cents a share because of a lower tax rate.

Contract signings rose 55 percent from a year earlier, signaling growth at IBM's global services unit will continue this year. Revenue at the division, IBM's largest, advanced 6.4 percent to $12.8 billion in the quarter.

IBM last month won a $9.4 billion order with Siemens AG to upgrade the German army's computers and phones. In November the company beat out Northrop Grumman Corp. to win an $863 million contract to take over data centers for the state of Texas.

Hardware Disappoints

Hardware revenue rose to $7.19 billion in the quarter as a weaker dollar helped boost the value of sales outside the U.S. Revenue would have been unchanged excluding currency effects. Gross margin narrowed to 41 percent from 42 percent year earlier.

``A lot of folks still think of IBM as a hardware company, not a software and services company,'' Enderle said. ``That may be why the market is nervous.''

Within the hardware unit, microelectronics revenue fell 6 percent. Enderle attributed that drop to Sony Corp.'s delay in releasing its PlayStation 3 video-game console, which uses IBM chips, and Apple Inc.'s switch to using Intel Corp. chips.

IBM sold its personal computer unit to Lenovo Group Ltd., China's largest computer maker, in May 2005.

The software division, IBM's most profitable unit, recorded a 15 percent increase in sales to $5.65 billion. Chief Executive Officer Sam Palmisano's purchases last year of more than 10 software companies including FileNet Corp. boosted profit.

``Performance was led by software,'' Chief Financial Officer Mark Loughridge said on a conference call. The company will continue making strategic purchases this year, he said.

IBM in August agreed to pay $1.6 billion for Costa Mesa, California-based FileNet, gaining programs that let workers share documents across corporate networks and the Internet. IBM the same month agreed to buy Atlanta-based Internet Security Systems Inc. for about $1.3 billion to gain software companies use to protect their systems against attacks from hackers and viruses.

The company's 4 3/4 percent note maturing in November 2012 rose 0.03 cent on the dollar to 97.66 cents on the dollar, according to Trace, the bond price reporting system of the NASD. The yield shrank to 5.22 percent.

To contact the reporter on this story: Ville Heiskanen in New York at vheiskanen@bloomberg.net.

Last Updated: January 18, 2007 18:08 EST